Question

Exercise 14-18 On January 1, 2017, Oriole Co. borrowed and received $508,000 from a major customer evidenced by a zero-interest-bearing note due in 3 years. As consideration for the zero-interest-bearing feature, Oriole agrees to supply the customer's inventory needs for the loan period at lower than the market price. The appropriate rate at which to impute interest is 8%. (*) Prepare the journal entry to record the initial transaction on January 1, 2017 1) Prepare the journal entry to record any adjusting entries needed at December 31, 2017. Assume that the sales of Oriole's product to this customer occur evenly over the 3-year period. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to o decimal places e.g. 58,971. If no entry is required, select "No Entry" for the account titles and enter for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) a) 1, 2012

Answer 1

Journal entries:

Date	Account title and explanation	Debit	Credit
Jan 1,2017	Cash	$508,000
	Discount on notes payable (508,000 x 8% x 3 years)	$121,920
	Notes payable		$508,000
	Unearned sales revenue		$121,920
	[To record issuance of notes payable]
Dec 31,2017	Interest expense [508,000 x 8%]	$40,640
	Discount on notes payable		$40,640
	[To record interest expense]
Dec 31,2017	Unearned sales revenue [508,000 x 8%]	$40,640
	Sales revenue		$40,640
	[To record unearned sales revenue]

Explanation:

Interest is compensated by discount on sales. Hence, discount on notes payable is written of by interest expense over 3 years and Unearned sales revenue written off by Sales revenue over 3 years.